LS7 - Decision Making Flashcards
What are the 2 approaches you should follow when making assumptions?
Deduction, induction
What is deduction?
Starting with a hypothesis and trying to prove it
What is induction?
Using evidence which you collected
Which schools of thought follow a deductive approach to making assumptions?
Classical
Neoclassical
Which schools of thought follow an inductive approach to making assumptions?
Behavioural
Keynesian
Which economist is known for the Classical school of thought?
Adam Smith
Which economist is known for the Neoclassical school of thought?
Alfred Marshall
Which economist is known for the Behavioural school of thought?
Richard Thaler
Which economist is known for the Keynesian school of thought?
Joan Robinson
What does ‘being rational’ for consumers mean?
Buying products which maximise their utility
What is utility for consumers?
The satisfaction or benefit derived from consuming a good
What does ‘being rational’ mean for firms?
Maximising utility / maximising profit
What is utility for firms?
Maximising their profit
In which schools of thought are decision makers assumed to be rational?
Classical
Neoclassical
What do economic agents require to make rational decisions?
Time
Information
Ability to process the information
What can cause decision makers to make irrational decisions?
Lack of time / information Being weak at computation Habitual behaviour / Consumer inertia Being influenced by other people Framing and Bias
What does Behavioural Economics assume?
Individuals wish to maximise their utility, but may not be able to due to different reasons
What is Nationalisation?
The process of bringing economic activity under state control
What is Privatisation?
The process of transferring economic activity from the state to the market
What is assumed of workers in neo-classical economics?
They maximise their welfare at work by considering pay, job security, location, satisfaction from working and the value of the other alternatives
What are the disadvantages of neoclassical economics?
Not all decisions that are made are rational
It can be over-simplified as some governments can be biased or corrupt, and managers can make decisions which benefit them
What is marginal analysis?
Analysing one isolated / marginal situation without considering its possible future knock-on effects
What is homo-economicus?
The perfect rational human which is used by economists when constructing, explaining and verifying models
What is consumer inertia?
People not changing their behaviour because they think it is not worth the effort
